Is incorporation right for you? Find out with this comprehensive article on the ins and outs of forming a corporation.
The term corporation comes from the Latin corpus, which means body. A corporation is a body–it is a legal person in the eyes of the law. It can bring lawsuits, can buy and sell property, contract, be taxed, and even commit crimes. It’s most notable feature: a corporation protects its owners from personal liability for corporate debts and obligations–within limits.
In Zimbabwe we have two types of vehicles that one can use for incorporating their business: The Company, under the Companies Act (Chapter 24:03) and the Private Business Corporation, under the Private Business Corporation Act (Chapter 24: 11)
The Private Business Corporation is cheaper and requires less paperwork and administrative procedures than the company and is thus suitable for small businesses and startups.
By incorporating, the incorporator will put on record facts, such as:
- the purpose of the intended corporation,
- the names and addresses of the incorporators,
- the amount and types of capital shares the corporation will be authorized to issue, and the rights and privileges of the holders of each class of stock.
It is true that operating as a corporation has its share of drawbacks in certain situations. For example, as a business owner, you would be responsible for additional record keeping requirements and administrative details. More important, in some cases, operating as a corporation can create an additional tax burden. This is the last thing a business owner needs, especially in the early stages of operation.
The most common motivation for incurring the cost of setting up a corporation is the recognition that the shareholder is not legally liable for the actions of the corporation. This is because the corporation has its own separate existence wholly apart from those who run it. However, let’s examine three other reasons why the corporation proves to be an attractive vehicle for carrying on a business.
Unlimited life. Unlike proprietorships and partnerships, the life of the corporation is not dependent on the life of a particular individual or individuals. It can continue indefinitely until it accomplishes its objective, merges with another business, or goes bankrupt. Unless stated otherwise, it could go on indefinitely.
Transferability of shares. It is always nice to know that the ownership interest you have in a business can be readily sold, transferred, or given away to another family member.
With corporations, all of the individual owners’ rights and privileges are represented by the shares of stock they hold. The key to a quick and efficient transfer of ownership of the business is found on the back of each stock certificate, where there is usually a place indicated for the shareholder to endorse and sign over any shares that are to be sold or otherwise disposed of.
Ability to raise investment capital. It is usually much easier to attract new investors into a corporate entity because of limited liability and the easy transferability of shares. Shares of stock can be transferred directly to new investors, or when larger offerings to the public are involved, the services of brokerage firms and stock exchanges are called upon.
Advantages of Incorporating
- Owners are protected from personal liability for company debts and obligations.
- Corporations have a reliable body of legal precedent to guide owners and managers.
- Corporations are the best vehicle for eventual public companies.
- Corporations can more easily raise capital through the sale of securities.
- Corporations can easily transfer ownership through the transfer of securities.
- Corporations can have an unlimited life.
- Corporations can create tax benefits under certain circumstances
Disadvantages of Incorporating
- Corporations require annual meetings and require owners and directors to observe certain formalities.
- Corporations are more expensive to set up than partnerships and sole proprietorships.
- Corporations require periodic filings with the state and annual fees.
However, the Private Business Corporation mentioned earlier, is designed specifically for small businesses and thus costs less to set up and maintain and requires much less amount of paperwork. (See the April issue of BusinessLink magazine for a comparative analysis between a company and a PBC).
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